July 2006

It appears that the US government is tip toeing toward reliquishing control of the Internet, and The Register explains in a long and intersting article. I thought these comments were particularly interesting:

It was apparent from the carefully selected panel and audience members that the internet – despite its global reach – remains an English-speaking possession. Not one of the 11 panel members, nor any of the 22 people that spoke during the meeting, had anything but English as their first language.

While talk centered on the future of the internet and its tremendous global influence, the people that sat there discussing it represented only a tiny minority of those that now use the internet every day. Reflections on the difficulty of expanding the current internet governance mechanisms to encompass the global audience inadvertently highlighted the very parochialism of those that currently form the ICANN in-crowd.

When historians come to review events in Washington on 26 July 2006, they will no doubt be reminded of discussions in previous centuries over why individual citizens should be given a vote. Or, perhaps, why landowners or the educated classes shouldn’t be given more votes than the masses.

On some level, this is obviously right. The Internet is now used by a great many non-Americans, and it’s understandable that they’d like some input into ICANN’s decisions. But I think the “democratic” frame for thinking about the issue is somewhat wrongheaded. The Internet is not a democratic country, and ICANN isn’t its government.

Firms have an incentive to engage in “platform protectionism,” which reduces the surplus created by network effects but can increase the share of that surplus captured by the firm.

Often, very little of the value of a platform can be explained by the design decisions of the firm that created it.

A platform owner will tend to under-license its platform due to the inability of intermediaries to capture the full value created by the platform. This problem gets worse as the number of intermediaries increases, inefficiently “flattening” the development structure.

I got a first-hand lesson in the pace of technological change when I was writing my paper on the DMCA. I wrote the first draft last July, went through Cato’s editing process from October to January, and then the paper was released in March.

Between the initial writing of the paper and its publication 9 months later, the online video marketplace underwent a revolution. When I was writing last July, I described the market for streaming video as stagnant, dominated by three mutually incompatible, vertically integrated video platforms controlled by Apple, Microsoft, and Real, respectively. By press time, YouTube had burst onto the scene.

The remarkable thing about YouTube is that from a technical perspective, there’s nothing especially remarkable about it. Instead of inventing their own video streaming format, as Apple, Microsoft, and Real had done, they built a video player atop Adobe’s popular Flash technology. Flash was originally designed as a platform for lightweight web animations, but it has evolved into a full-featured application platform. Luckily for YouTube, Flash was already installed on the vast majority of PCs and Macs, meaning that YouTube didn’t have to go to the trouble of getting its software installed on millions of PCs.

Here, I would argue, is an example of a case where we had at too many video platforms that tried to do too much. Had Microsoft, Apple, and Real been able to agree on a unified video format, and allowed other third parties to develop for that format, it’s likely that streaming video would have taken off much earlier. But because each company was more focused on making sure its format prevailed than on ensuring consumers had the best possible video experience, the streaming video market stayed in a kind of stalemate for close to a decade.

Don’t look now, but your VoIP service may be getting worse. According to a report released this week by Brix Networks, an Internet monitoring firm, VoIP quality measurably declined in the past 18 months. Specifically, it found that 20 percent of VoIP calls had “unacceptable” quality, as opposed to 15 percent a year and a half ago. (The data was gathered from testyourvoip.com, a web site operated by Brix).

The chief tech offier of Brix, Kaydam Heydarat, says the decline is the result of VoIP having to compete for resources on an increasingly crowded web. If that sounds familar, it should–opponents of mandated net neutrality have long argued that congestion could hurt time-sensitive applications such as VoIP if network owners aren’t allowed to prioritize traffic. As Mr. Heydarat says: The network is ready for VoIP… But now that there are more services running over the same pipe, carriers need to differentiate packets and prioritize service.”

Well, here we go again. Not satisfied with the prospect of merely regulating the broadcast television and radio airwaves, Congress is poised to again introduce legislation that would extend indecency regulations to cable and satellite television. Broadcasting & Cable magazine reports today that Rep. Dan Lipinski (D-Ill.) and Tom Osborne (R-Neb.) are introducing a bill, “The Family Choice Act of 2006,” that would try to control cable content by giving the industry a choice among three regulatory approaches.

The bill would require multichannel video providers to choose one of three options:

1) apply FCC broadcast indecency standards to their own programming;
2) offer channels a la carte so subscribers could choose not to take certain channels; or
3) offer a family-friendly tier that meets the definition supplied in the bill.

Wow, now how’s that for a devil’s choice! But cable or satellite providers shouldn’t be forced to pick among these poisons because government has absolutely no rational legal or philosophical basis for imposing censorship on pay-TV providers. As I noted last June in a Washington Posteditorial:

David Berlind elaborates on the sticky situation “Plays for Sure” vendors will find themselves in if Microsoft launches a device that isn’t Plays for Sure compliant:

Short term, Microsoft will have something by the holidays that, from a specification point of view, compares tit-for-tat with one or two devices. But Sasse as well as his contemporaries are in denial if they think this isn’t going to impact their business over the long run. Microsoft, of course, has to do whatever it thinks it must do to keep Apple from eating its lunch in the world of multimedia entertainment which is what Apple is doing, at least on some fronts). On the other hand, this is exactly the sort of risk that companies licensing such foundational technologies (as DRM) take when those technologies are proprietary and why, if at all possible, it makes sense to hedge that risk with product R&D around something more open. If I were Sasse, right about now, I’d be picking up the phone and calling Sun to find out more about the Open Media Commons and Project DReaM. It may not be perfect. But at some point, businesses and users need to get a better handle on how much of their strategies, budgets, and their investments in technologies (eg:users buying music) they’re willing to subject to decision making processes over which they have no control (eg: those of the vendors of certain proprietary technologies).

There’s a cruel irony here. I’ve always thought the “plays for sure” label was cynical, given that it prevented consumers from playing their music on the world’s most popular MP3 player. But here we see DRM potentially screwing over not just users, but also companies that foolishly deployed DRM technology controlled by a potential competitor.

One of the most frequently asked questions in the net neutrality debate has been why big Internet companies like Google and Microsoft support regulation so strongly. If, as they say, an unregulated market would squeeze out the little guy, you’d think these big companies would be dead set against regulation. And if opponents are right, regulation would make the Internet on which these companies depend much less efficient.

This should make more than a few shareholders of these companies nervous. So much so that one group–the Free Enterprise Action Fund–wants a shareholder vote to require Microsoft to prepare a report on its stance toward this regulation.

The Fund, it should be noted, is not a neutral observer. It is a mutual fund specifically geared toward “investment and advocacy to promote the American system of free enterprise.” But it raises a reasonable point. “We feel they should be worried about innovation and competition rather than perhaps running to the government for regulation,” says Tom Borelli of the Fund. ” “If they have thought this through and they know what they’re doing, what’s wrong with a report to your shareholders explaining your rationale?” he asks.

Good points. Of course, the proposed shareholder vote will probably not take place–corporation law provides plenty of ways to avoid such embarrassing things. Still, it would be interesting to see such a vote, and if Microsoft shareholders think regulation is in their best interest.

The Internet tax issue is not as hot and sexy as it was a few years back, but we can still give it a big KISS (Keep it Simple Stupid). Yesterday’s hearing of the Senate Finance Committee shows that there is still some thunderous passion over taxing the ‘Net. The hearing–consisting of two full panels of witnesses, one devoted to sales tax and another toward the business activity tax–featured state tax collectors and offline companies versus online companies and direct marketers. The legislative thrust of the one panel related to sales taxes is S. 2152, a bill introduced by Senator Michael Enzi.

The hearing revealed that the Streamlined Sales Tax Project (the SSTP, an attempt to make sales taxes more easily collectable by out-of-state sellers), just isn’t simple enough. In particular, I’ll direct TLF readers to the informative (and anti-SSTP) testimony of George Isaacson, tax counsel for the Direct Marketing Association.

The uninitiated can easily be caught up by all the different arguments advanced by proponents for the SSTP. Supporters say that a system that allows remote sellers to evade collecting sales tax from consumers hurts state tax revenues and is unfair to offline “Main Street” retailers that may have higher prices because they do have to collect the tax. But fortunately, while this high-tech debate may be fashioned by the seemingly borderless jurisdiction of digital networks, the old fashioned U.S. Constitution has something to say about this form of interstate commerce. A little background is required though.

Remember the digital TV subsidy? Last year, as part of the price for establishing a firm date for broadcasters to return their old (now) analog frequencies by 2009, making them available for new uses, Congress set up a program to subsidize converter boxes for those that don’t already have digital TV sets. More precisely, it ordered the Department of Commerce to set one up. It has now started that process–proposing rules on exactly who will will get money and how.

The total cost authorized for the program was $990 million–with an automatic extension up to $1.5 billion if Commerce so requests. That’s much less than the $3 billion at one time being considered by Congress, but still real money.

On Sunday I offered one reason that platform monopolies might not stimulate as much innovation as the ideal case would suggest.

Here’s another reason: R&D spending often has diminishing returns. The surplus generated by a successful new platform (DOS/Windows, x86, iTunes/iPod, etc) provides an enormous windfall to the company that creates it–a windfall that may be totally out of proportion to the amount of money the company spent developing the platform. The first version of Microsoft’s DOS operating system, was called QDOS (for quick and dirty OS) and was licensed from another company for a small sum. It’s not at all obvious that there’s any connection between the amount of R&D Microsoft did on early versions of DOS and the large subsequent profits they made.

If we had changed public policy in the 1970s to halve or double the long-run rewards to creating a PC operating system, it’s not obvious it would have changed the outcome for Microsoft one bit. For many technological categories, the winning platform tends to be made by the firm that is in the right place at the right time. Above a certain point, increased R&D spending is likely to show diminishing returns. It only costs so much to develop a microchip, an iPod, or an operating system. If the return on doing so is 10 or 100 times the cost, we don’t want firms to spend money beyond the point of diminishing returns.